Saving vs. Saving

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ProGolferWannabe

Recycles dryer sheets
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In the past I have seen posts here where people share/compare their savings rates. I have always been super impressed with the thriftiness of some of those who participated in discussions---lots of savings rates reported in excess of 50%. For us, we are at 30% (give or take a point or so)--I always thought that was pretty good until I started reading the posts here (sometimes ignorance is bliss!?)

Anyway, when I calculate my savings rate, I only count the money I am putting away for the long haul---basically retirement at this point. I am not counting money I am setting aside for purchasing/replacing cars, putting a new roof on the house, etc. I always felt like those sorts of items that I am "saving" for, are not really savings, but incremental expenditures that I am paying for on an on-going basis.

Not that it really matters (we are just categorizing different classes of "savings"), but for folks who report savings rates in the 50%+ range, when you figure your savings rate relative to your income, do you count "everything", e.g. even the money set aside each year to buy that new car 5 years from now, or do you just count the "longer term savings", e.g. money for retirement?

Really am just curious to get a perspective on how much I am saving relative to others here, and wanted to make an apples-to -apples comparison.

Thanks!
 
REWahoo said:
Well, the big question is do you include the value of your house as part of your retirement nest egg? :)
Click to expand...

Rightly or wrongly, I never included the payment (or prepayment) of principal on the house as savings. Just thought of it as an on-going "consumption typ" expense--which is probably pretty much wrong.
 
Mine is 8 inches... around.

Oh, you were talking about savings rates?
 
My wife and I save over 40% of our gross - and by "save" I mean "save for retirement".

I do not include saving for an emergency fund or short-term expense. I do not include the value of my home (mortgage interest or principal). I generally do not include equity in my home in any FIRE decision, as I think at some point that money will be moved into another home, and thus not available for spending in retirement. Obviously, that could change!

I am thinking that with our semi-annual budget/portfolio analysis this week, we might/could push it over 50%... which would be sweet.
 
I'm kind of on the same page as Brewer - it's mostly just bragging comparison to try to nail down the number too much. Without getting into my own, when I figure it, I do include the principal payment, since it's paying off real debt. I'm going to own this place for the long haul, and paying the mortgage off will significantly reduce my overall spending, so when I try to determine my total needed number, I generally back out the mortage payment and add a lump sum equal to the remaining mortgage. I don't bother counting equity since it's not part of what I'm going to use to generate income (other than replacing a rent payment that isn't accounted for in my budget). Figure the number in the way that suits your need and purpose. If that purpose is comparing to other people, well, calculate it large I suppose.
 
I've never put money away for a specific purpose except for things that were done so for tax reasons: 401Ks, IRAs and college savings accounts. I had thought about setting up specific accounts or holdings for things like cars, but it seemed like more trouble than it was worth, plus I don't have a specific schedule for replacing cars. Doing this for home maintenance expenses seems like even more work, so I just don't bother. Plus, if you need a new roof, but don't have enough set aside for it yet, you'd have to dip into other funds anyway. A vacation fund might make sense since that really is discretionary, but I don't do that either.

My answer for the long-term savings aspect is for you budget to include these expenses. This gives you an idea of what you are putting away each year for retirement and what is going for other irregular expenses, and you use it when you calculate if your nest egg plus other income sources is enough for your SWR to see when you can ER. If I had a major expense coming in the next year or two I'd go ahead and subtract that out. Until you're ready to pull the trigger, I feel it's really not that important to be precise about how much of your savings is for retirement as long as you're saving what you can. I think that works well for LBYM-types, but maybe not for others.

As far as comparing to others, I don't see how that really matters. You aren't going to live their lives, and they aren't going to live yours. You do the best you can, and retire when you can if that's your goal. Everyone has a different perspective on how much to save now vs. having a few more comforts or splurges, even here.
 
There have been a few threads about this topic.

Some folks include the employer match - because it's increasing their retirement funds. I don't, because it's not guaraneed, I have no control over, etc. I do count the total vested employer match in my networth, however.

I don't include my nominal mortage (P&I) payment - but I consider my excess mortgage payment - since my retirement plan is based on the zero mortgage budget... so paying down the mortgage gets me closer to my retirement budget goals. Like Seaborne, I also lower my nest egg by the remaining mortgage when running calcs... because I'll pay off the mortgage at retirement, if any still remains. It's money I'm diverting from spending and applying directly to something that improves my retirement budget.

but I get why people don't do that.

Also percentages are not a good comparison. Someone making $200k/year and saving $140k is saving a bigger pecentage than someone making $90k/year, and saving $30k... but both households are living on $60k. So their lifestyles are the same... but one is saving more.
 
People are social creatures, so comparisons happen whether we want them to or not. I think what matters most is what you do with those comparisons. I am sometimes inspired and sometimes dejected by the numbers I see, but my wife and I have cut our ongoing expenses by an additional 5% since I joined here, so I guess there has been value in my being here for us.

To answer the OP, I count the money put aside for large, intermittent expenses as savings, but I also subtract those expenses from my annual savings amount when they occur. This has given me a gross income savings rate of 28.4% and an after-tax savings rate of 40.0% over the last 23 years. Due to complications with my career choice, my wife and I rent rather than owning a home. We make decent money compared to the national statistics, but we also live in a very high cost of living area.
 
I made the reference to equipment size because that is inevitably what these threads boil down to. But I also never managed my affairs that way. There are times in my life when I saved a large percentage because I lived on less than my salary and banked the entirety of my (occasionally whopping huge) bonus. There are also times (like lately) that I have been content to simply max my 401k (plus employer match and whatever DW's rather small business brings in). I never cared about percentages, I just saved what I could and made sure never to go too deeply into debt. It must have worked because I am planning to ESR/ER at the age of 40 early next year.
 
RunningBum said:
I've never put money away for a specific purpose except for things that were done so for tax reasons: 401Ks, IRAs and college savings accounts. I had thought about setting up specific accounts or holdings for things like cars, but it seemed like more trouble than it was worth, plus I don't have a specific schedule for replacing cars. Doing this for home maintenance expenses seems like even more work, so I just don't bother. Plus, if you need a new roof, but don't have enough set aside for it yet, you'd have to dip into other funds anyway. A vacation fund might make sense since that really is discretionary, but I don't do that either.
Click to expand...
Same here...never had specific "buckets" because money is money. I do track expenses, though, and I can see if I'm spending more than last year or the year before in a specific area (like travel, for instance).

As to the "savings rate", I've never calculated that. I do calculate internal rate of return on my investments, so I have the data to see how much I put in versus how much the investment generated. But I find it much more interesting to look at the IRR than the ratio of the total I put in vs how much was in the paycheck.
 
brewer12345 said:
I made the reference to equipment size because that is inevitably what these threads boil down to. But I also never managed my affairs that way. There are times in my life when I saved a large percentage because I lived on less than my salary and banked the entirety of my (occasionally whopping huge) bonus. There are also times (like lately) that I have been content to simply max my 401k (plus employer match and whatever DW's rather small business brings in). I never cared about percentages, I just saved what I could and made sure never to go too deeply into debt. It must have worked because I am planning to ESR/ER at the age of 40 early next year.
Click to expand...

Congratulations on your tremendous accomplishment! Enjoy! :greetings10:
 
nash031 said:
My wife and I save over 40% of our gross - and by "save" I mean "save for retirement".

I do not include saving for an emergency fund or short-term expense. I do not include the value of my home (mortgage interest or principal). I generally do not include equity in my home in any FIRE decision, as I think at some point that money will be moved into another home, and thus not available for spending in retirement. Obviously, that could change!

I am thinking that with our semi-annual budget/portfolio analysis this week, we might/could push it over 50%... which would be sweet.
Click to expand...

Our rate and method of calculating things is exactly as describe here by nash. Now my rate has pushed closer to 50% these last few years before I FIRE, but my DW is closer to 20-25%, so our combined gross savings rate is prob close to 40% right now.
 
I save about 50% of my gross.

My paycheck is really really really small. The people that I manage probably have a bigger check than I do.

Of course I never notice how small it is because I always max out the 10% after tax in the 401k and the 25% in the pre-tax and use only one of my 2 paycheck.
 
brewer12345 said:
Mine is 8 inches... around.

Oh, you were talking about savings rates?
Click to expand...

Mine is 351 cubic inches (as in 351 Cleveland)...the only size that really matters... :dance: OK, back to savings rates...


I've never worried about calculating a savings rate. The DW and I have figured out over time what level of spending makes us happy and the diminishing returns curve is steep beyond that. It is much less than what we gross or net and my income can be variable (bonuses like brewer mentioned) so I don't give it much thought. It's all about spending and getting to a number that will generate that amount of income.
 
When I calculated this number, it was only to provide a simple way to communicate with my wife. "Last year we spent about 1/3 of our income, saved about 1/3, and used the other 1/3 for taxes and charity." When that's the purpose of the calculation, the last few percents weren't critical.

I did consider the principal payments on the mortgage "saving" as I viewed them as pre-paying some retirement living expense.

Like Brewer, we had ups and downs. When the kids started college, our savings rate went down. That didn't bother me. I wasn't trying to hit any particular number, just have some sense that we were living comfortably within our means.
 
Like brewer, I never calculated my savings rate, as it varied so much. I always saved as much as I could (within reason). Some years, that was zero, while others, it was around 40% of my income. Most of the time it was somewhere in between.

A good portion of my portfolio came from the purchase and subsequent sale of several properties, so calculating a savings rate wouldn't have told the whole story.

The main reason though, is that although I am in many ways numbers-oriented, I didn't feel the need to know my savings rate. How would it have helped me? I was already saving as much as I could.
 
Back in my working days, I calculated my savings rate as my total change in taxable (non-retirement) investments plus my contributions to my 401k plus any investment income from my taxable investments, as a percentage of total wage plus investment income. I did not include employer match or investment earnings from my 401k. I did not include unrealized gains or losses in my portfolio.

Most years it was between 30% and 60% but if I had a large expenditure such as a new car, buying my apartment, or paying down/off my mortgage/student loans, the savings rate took a hit that year.
 
IMHO, savings rate is important because it determines how many working years it takes until becoming FI. I've saved over 50% of gross income for 12 years and will be FI in 4 more years. Had I saved 30% on average, it would have taken almost 30 years, rather than the current estimated 16!!

Implicit in the savings rate is also your spending rate (and your "LBYM factor").
 
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